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Moody's changes Cognor's rating outlook to negative (Caa2 CFR)

December 4, 2012
London, 04 December 2012 -- Moody's Investors Service today changed its rating outlook for Cognor S.A. to negative from stable. The company's corporate family and probability of default ratings remain Caa2, and the rating for the EUR120 million of senior secured notes due January 2014, issued by the company's finance subsidiary Zlomrex International Finance S.A., also was affirmed at Caa2 (LGD4, 53%).

RATINGS RATIONALE

"The negative outlook reflects Cognor's weak operating performance in the wake of declining steel demand and prices in Europe but also in Poland, its largest market, and how these challenging fundamentals may affect the company's ability to arrange new financing needed to retire its senior secured notes when they come due on 2 January 2014," said Steven Oman, senior vice president and lead analyst for the EMEA steel industry at Moody's.

Steel market fundamentals have steadily worsened in 2012 as slowing in the Asian and North American economies, on top of the European recession, has undermined support for steel demand and prices. In the third quarter of 2012, conditions worsened in Poland, which unlike Europe as a whole had previously been experiencing modestly rising steel demand. However, in the third quarter demand for steel from the construction and automotive industries slowed for Cognor. In response, the group reduced its production and eliminated sales of semi-finished products outside of Poland as export margins were especially pressured. Shipments and sales in 3Q12 were both down about 22% compared to 3Q11 and EBITDA was down 70% Y-o-y, to PLN14 million. The company indicated that 4Q12 could be similar to 3Q12.

In Moody's opinion, today's difficult macroeconomic and steel market conditions are likely to continue into the first half of 2013. If so, Cognor's credit ratios, not strong to begin with, would weaken and potentially challenge its access to the debt and equity capital markets that are crucial to its needs as it seeks to refinance its EUR120 million of maturing senior secured notes, which come due on 2 January 2014. This raises the possibility of a distressed exchange. The 2014 notes represent about PLN490 million, or about 86% of Cognor's debt, while its market cap is currently about PLN150 million. As of 30 September 2012, Cognor had very limited net cash of PLN18 million and available credit facility capacity of PLN 6.5 million.

A further development for the company was its announcement on 14 November to invest in a new rolling line for long products, which will boost production of high alloy large rounds used by the auto industry. It has opened a tender, started negotiations with potential machinery suppliers, and plans to conclude the tender process soon. While the expansion and de-bottlenecking of the Ferrostal plant should provide good returns with minimal risk, it will contribute to a significant increase in the company's capex -- PLN 70 million in 2013, PLN150 million in 2014 and PLN130 million in 2015 -- compared to PLN10 to PLN20 million in the last two years. The potential rating impact of the expansion will depend on the economics of the changes to product mix and margins as well as the terms of the vendor financing associated with the project.

WHAT COULD CHANGE RATING UP/DOWN

Cognor's outlook could be stabilized if it successfully concludes a refinancing. An upgrade is unlikely until steel market conditions as they relate to Cognor's markets and margins improve, leverage is reduced, and financing for the expansion and upgrade project is arranged on satisfactory terms, in addition to the refinancing of the 2014 notes. A downgrade is possible in the second quarter of 2013 if refinancing has not been done and market conditions have evidenced no sign of material improvement.

The principal methodology used in rating Cognor S.A. and Zlomrex International Finance S.A. was the Global Steel Industry Methodology published in October 2012. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Cognor, headquartered in Poraj, Poland, is the largest trader of steel scrap and one of the leading producers of high grade long steel products in its domestic market. For the twelve months ended 30 September, 2012, its revenues were PLN1.56 billion.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the two years preceding the credit rating action. Please see the special report "Ancillary or other permissible services provided to entities rated by MIS's EU credit rating agencies" on the ratings disclosure page on our website www.moodys.com for further information.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Steven P Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Olivier Beroud
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Company — Cognor
  • Full name
    Cognor S.A.
  • Registration country
    Poland
  • Industry
    Trade and retail